Greek Rally Derailed as Austerity Undermines Valuations

By Namitha Jagadeesh and Tom Stoukas -
Nov 5, 2012

The four-month rally in Greek shares
that turned the ASE Index (ASE) into the most expensive national
benchmark in western Europe is ending as lawmakers squabble over
austerity measures needed to ensure the flow of bailout funds.

Greek stocks tumbled 8.3 percent last week, the biggest
decline in five months. The ASE had surged 88 percent from a
two-decade low on June 5 through Oct. 22 as Public Power Corp.
and Eurobank Ergasias SA more than tripled, pushing the gauge’s
valuation to 51 times estimated 2012 earnings, data compiled by
Bloomberg show. That was the highest on record and compares with
the five-year average of 11.7 times projected profit.

Politicians in Greece’s coalition government are debating
debt-reduction measures demanded by the European Union as the
nation completes its fifth year of recession. Inspectors from
the so-called troika of the European Central Bank, the
International Monetary Fund and the EU are negotiating with the
government over budget cuts and economic reforms, before a Nov.
12 decision on whether Greece will win a bailout that allows it
to stay in the euro.

“Greece’s political problems have come back, and that’s
what drives the market,” Gerard Lane, a strategist at Shore
Capital Group Ltd., an investment bank and stockbroker in
Liverpool, England, said by phone. “The economy shows limited
sign of healing, if any, and the desire for austerity seems to
be lacking.”

Market Capitalization

Greece’s market capitalization is 87 percent below the
record $273 billion reached in November 2007 as surging
borrowing costs forced the government to accept two EU-led
bailouts. Greece sought a 110 billion-euro ($141 billion) rescue
package in May 2010. Finance ministers from the 17 nations that
share the euro approved a second round of assistance, worth 130
billion euros, in March 2012.

Stocks surged to a 13-month high on Oct. 22 as ECB policy
makers approved an unlimited bond-buying program to control
borrowing costs in the region’s weakest economies. The gains are
unraveling as Prime Minister Antonis Samaras’s bid to placate
creditors with 13.5 billion euros of austerity measures runs
into opposition from members of his coalition. The ASE rose 3.4
percent to 829.07 at the close in Athens today.

Samaras’s New Democracy is reliant on lawmakers from the
socialist Pasok party and the Democratic Left to pass labor
reforms and other changes before the troika will release the
next 31.5 billion euros of aid. A law on state asset sales
scraped through Parliament on Oct. 31, with 148 votes in favor
and 139 against, raising concern Samaras’s coalition may not
have enough support to pass the austerity package.

Bailout Funds

Greek lawmakers are likely to hold a ballot on the measures
this week, before a meeting of euro-area finance ministers on
Nov. 12. Pasok lawmaker Michalis Kassis said last week he will
sit as an independent and vote against the austerity plan.

“The vote coming up on a 13.5 billion-euro package of
austerity and reform measures is key,” said Manish Singh, who
helps manage $2 billion as head of investment at Crossbridge
Capital in London. “The question is: will the coalition manage
to get support for it? If it doesn’t, further assistance from
the troika can be in jeopardy.”

Greece’s economy will shrink 6.6 percent this year, with
further contractions in 2013 and 2014, economists’ forecasts
compiled by Bloomberg show. The jobless rate has climbed to more
than 25 percent as politicians push through cuts to benefits,
wages and pensions. The government projects debt will peak at
192 percent of gross domestic product in 2014.

‘Greater Risks’

The situation in Greece is currently the biggest challenge
to the euro area, Alex White, an economist at JPMorgan Chase &
Co. in London, wrote in a report. “We think it has the numbers
on current projections, but risks remain.”

Stocks in Greece are too cheap to pass up, according to
Nektarios Papagiannakopoulos, senior research analyst at Dromeus
Capital Management SA in Athens, which manages $130 million.

Dromeus buys shares in companies “that stand out on
management-crisis response, business models allowing strong cash
generation and balance sheet quality with fully funded
operations,” while avoiding those with retail-consumption
exposure, he said. He did not name individual stocks.

Individual Investors

Individual Greek investors accounted for 40 percent of
trading in the nation’s stocks during September, the highest
level since at least 2007, Athens Exchange Chairman Socrates Lazaridis said on Oct. 10. That’s a 10 percentage point increase
from last year, data provided by Hellenic Exchanges SA as of
Sept. 28 showed.

The ASE traded at a record premium to analysts’ forecasts
last month, according to Bloomberg data going back to July 2010.
The gauge was 16 percent above the average level of brokers’
share-price estimates for individual companies, the data show.
Every other market in western Europe traded at a discount.

Companies in the ASE will earn 17.65 euros a share in 2012,
according to analysts’ projections compiled by Bloomberg. That’s
down from an average forecast for profit of 82 euros at the
start of the year.

Listing Switch

While Public Power Corp., Greece’s biggest electricity
producer, and Eurobank, an Athens-based lender, have rallied
since June, Coca-Cola Hellenic Bottling Co. SA (EEEK), the country’s
largest company by market value, plans to switch its main stock
listing from Athens to London next year. The move will make the
world’s second-biggest Coca-Cola bottler eligible for inclusion
in the benchmark FTSE 100 Index. (UKX)

The yield on Greece’s benchmark 10-year bond rose three
basis points to 18.19 percent on Nov. 2, widening the spread to
similar-maturity German bunds to 16.74 percentage points.

While the ECB’s bond-buying plan has calmed fears of a
euro-zone breakup, it has not restored international investors’
confidence in Greek equities, according to Kevin Gardiner of
Barclays Plc.

“Even with the ECB’s actions, investing in Greek stocks is
one risk too far,” said Gardiner, head of investment strategy
for Europe, Middle East and Africa at Barclays Wealth &
Investment Management in London. “We are not recommending it to
our investors.”